Updated on 11.03.11

How Important Is It to Start Early?

Trent Hamm

I get a lot of emails from people in their forties and fifties who are suddenly panicking about their retirement savings. Often, they don’t have any or they have very little, yet they still want to retire at age 65.

At the same time, I also get emails from people in their twenties who are already saving diligently for retirement. What they want to know is how much they actually need to save so that they, too, can retire at age 65.

The people in the first group obviously spent a big chunk of their adult life not having to save for retirement. This gave them more flexibility with their money in their twenties and thirties than people who were already saving for retirement.

On the other hand, people who start saving early don’t have to save as much overall as people who start later on.

So, which approach is better? Let’s look at the two cases.

Let’s say you’re 20 years old right now. You want to have $2 million set aside for retirement at age 65 and, magically, there’s an index fund out there that will return 7% a year (I’m using this index fund as a convenience, basing the 7% on what Warren Buffett suggests is a good number to use for average stock market returns going forward).

If you start investing at age 20, you’ll need to put aside about $510 a month to reach this goal.

If you start at age 25, you’ll need to set aside about $725 a month to reach this goal, but you don’t have to save anything from ages 20 to 25.

If you start at age 30, you’ll need to set aside about $1,050 a month to reach this goal, but you don’t have to save anything from ages 20 to 30.

If you start at age 35, you’ll need to set aside about $1,530 a month to reach this goal, but you don’t have to save anything from ages 20 to 35.

If you start at age 40, you’ll need to set aside about $2,270 a month to reach this goal, but you don’t have to save anything from ages 20 to 40.

If you start at age 45, you’ll need to set aside about $3,480 a month to reach this goal, but you don’t have to save anything from ages 20 to 45.

If you start at age 50, you’ll need to set aside about $5,600 a month to reach this goal, but you don’t have to save anything from ages 20 to 50.

As you read through those previous sentences, you probably thought that the amounts early on were quite manageable, but when you got to age 50, you’re likely thinking that it’s bordering on impossible.

That’s the lesson here. You can forego the early retirement savings, but catching up later on can be incredibly punishing and the longer you wait, the more punishing it gets.

Thus, my advice is to start saving for retirement right now, no matter what age you are. Even if you can’t save very much, start by saving something. If you’re not saving, you need to be doing something else that’s financially urgent with your money.

For example, if you just save $100 per month starting at age 20 in the above retirement account, increase it to $200 a month at age 30, $300 a month at age 40, $400 a month at age 50, and $500 a month at age 60, you’ll have $720,000 saved for retirement. Double each of those numbers and you’re getting close to where you need to be.

Start saving now, even if it’s just a little bit. Don’t burden your future self with crippling amounts of retirement savings or employment until the very end of your life.

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  1. Johanna says:

    I agree with the central point, but you’re ignoring inflation. For someone who’s 20 right now, a $2 million nest egg will buy a lot less at age 65 than it will for someone who’s 50 right now. Alternatively, saving $5600/month will be a lot easier 30 years from now than it is today.

  2. Vanessa says:

    I wish I could say the reason I didn’t invest much when I was younger was for “flexibility.” I just plain didn’t have the money.

  3. Wiley says:

    Sums up pretty well with just the phrase: time value of money.

    He’s right that starting at 20, you will access after 45 years of inflation instead of only 15 with age 50, but the magnitude of the return on investments SHOULD greatly exceed the inflation and thus TVM is on your side.

  4. krantcents says:

    Starting early has huge benefits even if it is for a small amount. $2,000 a year (roughly $40 per week) will yield hundreds of thousands of dollars at retirement if started at 20 years old.

  5. Matt says:

    I was thinking “there’s no way I can match that” until I actually calculated out how much I’m putting in my 401k plus my employer match… and discovered I’m actually not doing terribly…

    @ Johanna – Assuming constant 7% returns forever (a big assumption, but I’ll roll with it for example’s sake) and no use of the capital, having $2 million in the bank 30 years from now will still yield $140k/year.

    For comparison, $2 million from 1980 is equivalent to $4.8 million in 2010 (using the consumer price index as the basis for comparison). Assuming the same type of increase happens going forward, the $140k you’ll get in 2040 will be more like $58k now. That might not be travel-the-world-in-style money, but it’s still pretty decent!

  6. Johanna says:

    @Matt: But someone who’s 50 years old today won’t have to have as much in the bank to fund that same “pretty decent” retirement, so they won’t have to save as much either. Trent’s analysis overstates the difference between what the 20-year-old needs to save, and what the 50-year-old needs to save, to live the same lifestyle in retirement.

  7. Tracy says:

    I think it goes without question that the more you can start to afford saving earlier, the better off you will be at retirement.

    But I wish people would stop using the 7% a year number, because it just doesn’t reflect reality.

  8. moom says:

    I’m 46 and Snork Maiden is 36. We are saving more than $5,000 per month with high but not extraordinary incomes. My salary is $A144k and hers is $A82k. We spend about $5,000 per month too. When I was 36 I earned a similar amount to Snork Maiden now adjusted for inflation and I was single. When I was in my 20s I was a grad student or on a entry level salary and really couldn’t save anything. So if you have a successful career and don’t expand your lifestyle too rapidly you can get a very high level of monthly savings later in your career. It’s not impossible. Of course, I was saving in my 30s but I couldn’t save in my 20s. My point is, don’t think you can’t afford to go grad school or have adventures or have children in your 20s because you need to save for retirement. Probably you should be saving something by your 30s. Unless you are unlucky the amount you can save might rise rapidly later on.

  9. Tracy says:

    Precisely, Johanna.

    Someone at 50 right now may need to save 1M in 15 years to achieve the retirement standard of living they’re looking for. Someone who is 20 right now, needs to save 2.4M over the next 45 years to achieve the exact same standard of living. That’s apples to oranges.

    The flip side is that somebody who is 20 right now who doesn’t save at all for the next 30 years, has to save the same 2.4M in 15 years that the 20 year old does now. That’s apples to apples.

  10. Johanna says:

    “The flip side is that somebody who is 20 right now who doesn’t save at all for the next 30 years, has to save the same 2.4M in 15 years that the 20 year old does now. That’s apples to apples.”

    True, but for that now-20-year-old, it will be easier to find a spare $5000+ per month in 2041 than it is to find that amount today. So there are still some oranges involved, it seems to me.

  11. Tracy says:

    True – although that’s more a reflection of Trent’s overly simplistic ‘take the total amount you need to save and divide it up evenly over the total amount of time you plan to save’ rather than looking at the way people tend to actually save for retirement through percentage-of-income.

    Which, the practical view is – start saving as early as you can afford to, with the amount you can afford and as your salary/income increases, increase the amount as you can. Evaluate regularly to see how it’s looking and adjust as you can – the closer to the actual goal, the more you adjust (at 22, you’re probably don’t have enough data yet to do much adjustment, at 55, you should know how on-target you are)

  12. valleycat1 says:

    To me, the eye-opening numbers that shows the benefit of starting early, using Trent’s projections:

    20 y.o. invests a total of $275,400 but ends up with the $2mil (40 yrs x 12 mos x 510)

    50 y.o. invests a total of just over $1.008 to end up with the same $2 mil (15 yrs x 12 mos x 5,600)

  13. valleycat1 says:

    That should be:

    20 y.o. invests a total of $275,400 but ends up with the $2mil (40 yrs x 12 mos x 510)

    50 y.o. invests a total of just over $1.008 million to end up with the same $2 mil.
    (the million got lost in the editing)

  14. Steven says:

    I’m not going to squabble over starting to save early, the benefits are obvious. What I’m curious about is what’s a reasonable target dollar amount to shoot for? Rounding to the nearest million seems a bit ambiguous. If I were to live until I was 90, and kept my same standard of living as today, I’d be able to retire on $700,000 (ignoring interest after retirement for simplicity sake) without having to earn another penny.

    But how many retirees actually retire in the sense that they aren’t earning some kind of income, or Social Security, etc? (Yes, I know SS isn’t something we should be banking on…)

    Curious of people’s thoughts.

  15. George says:

    > But I wish people would stop using the
    > 7% a year number, because it just doesn’t
    > reflect reality.

    Right, it understates reality. My return for the past three years has been over 20%.

  16. Andrew says:

    This entire discussion takes for granted the continuation of today’s economic and political systems. Rather hopelessly optimistic–and unimaginative.

  17. Rap says:

    Well, Andrew, what should we assume? If the US government, my current country of residence has a massive political upheaval in five years, for example, what should I be saving now to prepare for that?

    And should I also spend some money on survival supplies since 2012 is coming and no one can prove thew world won’t end? Or maybe, since the world could end at any moment, I am foolish to save ANY money…. and what about if 15 years from now, we’re forced to invade Canada because of global warning. What should I do in my retirement planning to account for massive upheaval in the world?

  18. Jeroen says:

    If i could get a surefire 7%, I would borrow lots of money to invest. I’m sure to find a loan below 5% (assuming 2% inflation) Then pay back the loan instead of saving.

    Don’t do this, btw. I just want to point out that the article is full of assumptions that make the comparison really unhelpful. I get and agree with the main point of saving early, but the example given isn’t a convincing one.

    Another strange assumption is that all that money is invested in the stockmarket. No-one is buying a home in the example? Or doesn’t that count as saving for retirement? If it doesn’t, maybe the non-early savers have more money to buy and maintain a better home of pay it off earlier?

  19. Kevin says:

    You guys harping on inflation are missing one key point. If you adjust the expected rate of return to account for inflation, then the rest of the numbers can be compared directly.

    That is, if you think inflation is going to average 2%, then instead of using a 7% return for your investments, use 5%. Then you can forget about inflation for the rest of the equation.

    Inflation and rate of investment return are not independent variables. They’re directly related. So if you account for inflation in your rate of return, then you can forget about it completely for the rest of the comparison. If inflation runs higher, then so will your returns. If inflation lags, then so will your returns. It will all balance out. You will not get 12% returns in a 0-inflation environment, nor will your returns be flat if inflation is roaring along at 3.5%. Inflation is based on the economy, as are the profits (and dividends/capital gains) of the business that make up that economy.

  20. getagrip says:

    @14 The most reasonable assumptions I’ve heard for “target” values for US residents revolve around percentages saved typically from 30 to 65 years old and general expectations on that rather than a dollar amount or multiples of your final salary.

    Save 10% of salary and you will likely get buy fine but not be taking world cruises or golfing every day or have other expensive hobbies.

    Save 15% of salary and you should be able to maintain the same level of living you enjoyed while working full time.

    Save 20% of salary and you will likely be able to enjoy a nicer retirement, potentially better than your standard of living before you retired.

    Of course the above makes a number of assumptions, that you are working during that whole time, that you are reasonably healthy, that there is some manner of social security to help, that you aren’t supporting your kid(s) and their family, that you aren’t trying to perfectly preserve principal or live to 125, etc. So adjustments would need to be made based on individual circumstances, maybe working another year or so, or having to accept a lower level of living in retirement.

    Honestly though, we’re projecting out 20 to 40 years. 40 years ago (1972) the cold war was still a serious reality, the US was about to hit an energy crisis, etc. There are no guarantees for the future. No one knows exactly what the situation will be, what rates and the market will be doing, etc. Yet the basic advices has held for a long time, minimize or eliminate your debt before you retire, save a percentage of your salary throughout your lifetime, and invest most of it according to your risk tolerance, and chances are you may have to adjust when you reach retirement age and even after, but you’ll manage fine.

  21. getagrip says:

    “…start saving for retirement right now, no matter what age you are. Even if you can’t save very much, start by saving something”

    To me this is the most important point of the article. To many times I’ve heard coworkers and relatives effectively say “chuck it, I’ll never save what they’re telling me I’m supposed to save so why bother.” I’d rather be looking at age 65 with $100K in the bank than nothing but a Social Security check coming in. At least I’d have some potential options, even if it was nothing more that taking an additional $5K a year until I was 85.

  22. jackowick says:

    I can’t believe the bickering over inflation and quality of life and things that are really not the point of the article. The article is about the power of the time value of money; the return rate and goal value are really inconsequential. Run the same article with “you want $10 million in the bank at age 65 and returns will be 1.5%” and the argument is the same; INVEST AS EARLY AS YOU CAN.


    If you’re late to the game of saving, then there’s the other weapon at your disposal: income and deferring social security. Any income you bring in after SS age eligibility means you won’t have to dip in the jar as much. And the longer you put it off, the more you have. Suddenly you may have a plan that can make that money you “started” saving at age 50 get an extra 5 or even 10 years to stew.

    So keep the chin up, late savers, because it’s always better to start saving later than NOT AT ALL.

  23. Mary says:

    Ugh. I’m 25 and I haven’t even begun to save for retirement yet because of being in college and having 3 years of bad luck/unemployment/going back to school. I will be starting next year when I graduate and start my internship as a full-time career, and this article is definitely motivating to me. Reminds me that this is important in my financial future. Can’t believe in even just 5 years of not saving I have to save even more now, and it’ll get even worse if I don’t start.

  24. valleycat1 says:

    #23 Mary – don’t panic yet. Trent just pulled the $2 million out of his hat. With the standard 4% drawdown rate, that would give you $80K/year at retirement. Supposedly you’ll have your house paid off, kids are living on their own, and other expenses reduced, so $80K to me sounds like a lot. You need to figure what you think you’ll need when you retire. Comment #20 gives the usual guidelines – you may need to adjust up a little bit with the later start, but I’d say very few people plan to or will have $2 Million in a retirement account at age 65.

  25. AnnJo says:

    I’ve always thought of retirement planning as a two-pronged approach: Increase your retirement savings AND reduce your retirement needs. Clearing all debt and owning your own home is an obvious way to do the latter.

    Another excellent way is to acquire more skills and the tools to practice them. Gardening, landscaping and pruning, efficient cleaning techniques, canning and food preservation, carpentry and woodworking, pest control, hunting, fishing, home plumbing and electrical repairs, firewood harvesting, auto maintenance, appliance repair, investment management, tax preparation, fitness programs, self-defense, first aid and basic home diagnostics and treatment of minor maladies, etc.

    I wish I had started at a younger age picking one of those skills every year or two and really working on developing it and acquiring the tools needed for it. Not only would I have had more disposable income available to save for retirement, but I would have reduced my needs in retirement and built self-sufficiency. And had a more interesting life, too, probably. You meet different kinds of people and get a better perspective on life when you branch out and expand your capabilities.

  26. AnnJo says:

    @23 Mary, I agree with valleycat1 that the $2 million is an arbitrary number.

    My Quicken retiremeht calculator tells me that if I retired at age 65, with the expectation of surviving to age 95, with $2 million in savings earning 7%, I’d have about $80,000 a year AFTER assuming a 4% inflation rate and AFTER taxes at a 20% tax rate and assuming NO other income including no Social Security.

    Since my home is paid for and my other expenses have been substantially reduced through fairly frugal habits, I frankly don’t know what I would do with that much after-tax income. Including health insurance, my living expenses now are under $40,000.

    I’m quite comfortable planning on a well-diversified and somewhat inflation-proofed $1 million portfolio, no debt, a paid off home and a paid off rental property. One could get by decently on considerably less than that assuming some Social Security income and that’s a reasonably safe assumption for anyone within 15 years of retirement. Beyond that is anyone’s guess.

  27. Elizabeth says:

    Here’s another advantage of saving early- being used to living on less.

    Take person A and person B, both who make 1,500 a month. Person A saves $500 every month. Person B saves nothing. Come retirement time, Person A not only has money in the bank, but can maintain their standard of living at $1K a month. Person B has nothing and will have to cut their $1.5K/month standard of living.

    The more you save means you’re used to living on less, which means when it’s time to start using those savings, they’ll last even longer. Save early, save often.

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